Lifting the Oil Export Ban?

One of the energy themes we need to keep track of in 2014 is the possible end of the crude oil export ban here in the U.S., in place since the 70s. Energy Secretary Ernest Moniz called the ban "outdated" at the Platts energy conference here in New York last Thursday.

Because of the quick rise of domestic oil production from shale, the U.S. built up a deep surplus of high-quality, low-sulfur crude oils being produced in the mid-continent from the Eagle Ford, Bakken and Permian shale plays. But because of the export ban on domestic crude, that oil has been forced into storage in financial nexus points like Cushing, Okla. and refinery nexus points like the Gulf Coast. That, in turn, has caused a discounted price for our own produced crude oil compared to global prices, ranging in the last two years from $6 to $25 a barrel.

Oil companies have been lobbying the Commerce Department to relax the hurdles to gaining export licenses, currently only rarely given and almost exclusively for export into Canada (where there is plenty of cheap crude anyway). The statement by the Energy Secretary would seem to indicate that the White House is ready to discuss an end to the export ban.

Energy companies like ExxonMobil (XOM), which has been a vocal advocate of ending the ban, claim that a free market for exporting would lower energy prices here in the U.S., while environmentalist and consumer advocates like Sen. Sherrod Brown (D-Ohio) argue that export of domestic resources would lead to higher gasoline prices. Neither side is being completely honest. Free export rights for domestic crude oil would allow U.S. producers to more easily access a higher global price, their real goal, while likely not affecting the consumer cost of gasoline much. That's because gasoline already is free to export and consequently already follows global pricing closely.

The real downside for environmentalists in free market export is that the shale-drilling mania in our less-developed plays would get even more heated. The ability to capture an additional $10 a barrel would make many more potential reserves cost efficient for exploration and production. We'd see an even more intense rise in U.S. production numbers.

From a stock investing vantage point, the winners and losers would be easy to spot if an export ban were to end. Domestic E+Ps would be the big winners as they could capture a global crude price currently more than $10 higher. Implied transport costs would likely mitigate in the face of the financial arbitrage that would occur between the two benchmarks. Players like Continental (CLR) (CEO Hamm has been a big export advocate), EOG Resources (EOG), Cimarex (XEC), Pioneer Natural Resources (PXD) and countless other smaller players would see their share price explode.

On the flip side, domestic refiners, particularly those with mid-con refining strength like Holly Frontier (HFC), Western Refining (WNR), Tesoro (TSO) and Valero (VLO), would lose most of their margin benefits and get crushed.

One other stock is sure to get hurt: Chicago Mercantile Exchange (CME). An end to the export ban would deeply weaken the strength of using West Texas Intermediate crude, priced in Cushing, as a financial benchmark. The long history of two crude benchmarks would probably come to a close, as the Brent global benchmark controlled by the IntercontinentalExchange (ICE) would take clear dominance and push WTI off a cliff.

With so many billions of dollars and so many companies' bottom lines at stake, there'll likely be a lot of money pushing this issue around from both sides in 2014. And each way the situation turns, it will likely affect the trading of these stocks.